Finance Minister Jim Flaherty could have a big surprise in store for Canadians on March 22 — a much smaller deficit than predicted.

A new analysis by the TD Bank says Ottawa’s fiscal position is in much better shape than it reported last fall, thanks to a stronger economy and higher tax revenues in the second half of 2010.

That means the deficit is likely to come in at $39.5 billion this fiscal year — $5.9 less than projected.

As well, should the economy continue to expand as the current rate, next year’s deficit — the 2011-12 fiscal year — could shrink to $21.7 billion, $8.1 billion less than projected.

“The story is that the economy has been perking up lately and this is going to deliver a nice benefit to the short-term revenue performance,” said Derek Burleton, TD’s deputy chief economist and one of the authors of the report.

If true, the numbers give the Harper government a $14-billion gift it can announce in the March 22 budget in terms of smaller deficits, or use at least a portion for election goodies.

The opposition has been attempting to paint the Conservatives as incompetent for having turned a large annual surplus into the largest deficit in Canadian history in 2009, amounting to $55.6 billion.

But with a $46-billion two-year stimulus package due to end March 31, and the economy last year growing about half a point higher than anticipated in last March’s budget assumptions, the tide on the deficit is turning quickly.

A key reason is the unexpectedly strong growth in nominal gross domestic product because of the wealth effects created by commodity exports. Nominal GDP, which directly impacts government revenues, expanded by 6.2 per cent in 2010, rather than the 4.9 per cent anticipated in last year’s budget. TD Bank believes nominal growth will be 5.9 per cent this year, half-a-point higher than the budget number.

Flaherty is likely to hear more about the upbeat outlook for the economy on Friday, when he meets with private sector forecasters in Toronto.

Other analysts have also pointed out that the deficit is shrinking faster than projected, but none have seen the momentum pick up in the upcoming year.

The most recent report by the non-partisan Parliamentary Budget Officer shows a deficit similar to the TD’s for the current 2010-11 year, but still sees the upcoming year’s deficit coming at just under $30 billion, as does Ottawa’s official estimate.

Bank of Montreal economist Douglas Porter says TD’s estimates are not unreasonable, but cautioned it will prove difficult for Ottawa to shrink the deficit so quickly.

“If anything, I’ve seen forecasts that assume an even bigger drop in the deficit,” responded Burleton.

The TD bank economist adds he is not predicting Flaherty will table such deficit projection, only that he can. He is assuming there is no significant new spending in the budget, he said, and that Ottawa will stick to its guns on reining in government spending.

With an election possible this spring, both tasks might prove too difficult for the minority government, Burleton admits.

“What this shows is the government will have more wiggle room on what it can do.”

The TD analysis doesn’t have the government balancing the budget any earlier than the 2015-16 fiscal year Ottawa has targeted, mostly because the government has inserted stronger growth in the outgoing years than the TD thinks will happen. But both see the government returning to balance in four years, and TD forecasts lower deficits each year up to that point.

Over the projection period, TD estimates Canada’s overall debt will grow by $23 billion less than what the government has predicted.